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Fixed-income traders are telling the Federal Reserve that it might end up making a big policy mistake.

The Fed hasn't explicitly said when it would stop shrinking its balance sheet.

Currently, the Fed is paring its bond holdings by a maximum of $50 billion a month.

Since the Fed started shrinking its assets, reserves have fallen by more than half a trillion dollars, according to Fed data from Barclays.

"The current backdrop is one that is dominated by the regulatory landscape," said Jonathan Cohn, the head of interest-rate trading strategy at Credit Suisse. He estimates excess high-quality liquid assets (which include reserves) at the eight U.S. globally systemically important banks have fallen by more than 15 percent since the Fed began its unwind.

In June, the Fed tweaked IOER so that it is now slightly below the upper target.

Since the Fed began paring its bond holdings though, the effective rate has started to creep higher.